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Kransco v. American Empire Surplus Lines Insurance Company6/22/2000
of good faith and fair dealing does not always necessitate reciprocal conduct. (See, e.g., Commercial Union Assurance Companies v. Safeway Stores, Inc., supra, 26 Cal.3d at pp. 917-921 [insurer may be obligated to accept a settlement offer to protect its insured from personal liability but insured is not similarly obligated].) Because an insured's breach of the covenant does not sound in tort, the insured's contractual breach of an express policy provision cannot be raised by the insurer as a defense in a bad faith action brought against it by the insured. It would be illogical to allow the insurer in such a suit to instead interpose as a defense the insured's contractual breach of an implied policy provision (i.e., the covenant of good faith and fair dealing) based on those same express policy terms.
The recent decision in Agricultural Ins. Co. v. Superior Court (1999) 70 Cal.App.4th 385 (Agricultural) is in accord. Agricultural involved a bad faith action arising out of an insurance claim for earthquake damage. After the insurer paid the claim in part controversies arose, ultimately leading to the insured's suit for breach of contract and bad faith. The trial court stayed the action to allow the insurer to complete its investigation. The insurer did, and then cross-complained, contending that the insured's claim was in significant part falsified. The insurer pleaded various contract theories, and also the tort theories of fraud and so-called reverse bad faith, i.e., tortious breach of the covenant of good faith and fair dealing by the insured. The insured demurred to the tort theories, and the trial court sustained the demurrers without leave to amend. (Id. at p. 389.)
In denying in part the insurer's petition for a writ of mandate to set aside the trial court's order sustaining the demurrer to the reverse bad faith cross-claim, the Agricultural court explained: "An insurer has no claim against its insured in tort for breach of the covenant of good faith and fair dealing. A breach of this covenant is, at base, a breach of contract. A relationship including specialized circumstances of reliance and dependence is necessary to transmute such a contractual breach into a tort. Such circumstances do not exist in the context of an insured's responsibilities toward its insurer, or in the reciprocal context of an insurer's legitimate expectations from its insured. Although a false claim by an insured might trigger adverse contractual or penal consequences, the obligations undertaken by an insured in entering into an insurance contract are simply not of the same character as the obligations undertaken by an insurer. Hence an insured does not bear a risk of affirmative tort liability for failing to perform the panoply of indefinite but fiduciary-like obligations contained within the concept of `insurance bad faith.' The trial court therefore correctly sustained the insured's demurrer to the insurer's `reverse bad faith' claim . . . ." (Agricultural, supra, 70 Cal.App.4th at pp. 389- 390.)
In granting in part the insurer's petition for mandamus relief to set aside the trial court's order sustaining the demurrer to the fraud cross-claim, the Agricultural court explained: "Although an insured does not bear the type of obligations which can give rise to a claim for tortious breach of covenant, an insured-no different than everyone else-has a duty not to defraud. Firstly, an insured must not defraud in the procurement of the policy. Secondly, an insured must not defraud in making a claim on the policy. When an insured makes a claim to its insurer, the insurer's duty to investigate is triggered. If, because of the insured's false factual assertions, the insurer incurs expenses that would otherwise not
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